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As the Market Anticipates a Wild Post-Earnings Move, Netflix is a High-Probability Trade.

January 23, 2024
minute read

Netflix (NFLX) initiates the tech earnings season with its announcement after Tuesday's market close, and there is widespread anticipation of a significant price shift. We will explore a strategic bet with a high likelihood of success, dependent on whether Netflix's movement aligns with or deviates from market expectations.

While the impact of earnings reports on stock prices is recognized, accurately predicting the direction of this movement remains a challenging task. A closer examination of NFLX's historical price fluctuations following the last five earnings events reveals a discernible trend.

It is noteworthy that most shifts related to earnings are typically contained within a 10% range. However, outliers such as the 13% surge on October 19, 2022, and the 16% jump on October 19, 2023 underscore the inherent volatility of the stock. Any unexpected beats or misses in subscriber numbers have the potential to instigate substantial market movements.

Taking seasonality into account, the recorded price movement after earnings in January of the preceding year stands at 8.5%. This historical context provides valuable insights into the potential magnitude of market reactions following the impending earnings announcement.

As traders speculate on imminent events like earnings announcements, the demand for options rises, leading to an upswing in the prices of options expiring shortly after the event. The additional cost, commonly referred to as "juice" or "premium," is termed implied volatility (IV).

In the case of highly liquid stocks, IV (implied volatility) becomes a pivotal metric, used to gauge the extent to which the options market anticipates the stock's movement following an earnings disclosure. In the given example, the expected move for NFLX is indicated as $38 in either direction.

Upon the announcement of earnings, the IV (implied volatility) of options experiences a sharp decline. This is immediately reflected in options pricing on the day following earnings, and options shed all the inflated "juice," resulting in a significant drop in value.

Adan Harris
Managing Editor
Eric Ng
John Liu
Editorial Board
Bryan Curtis
Adan Harris
Managing Editor
Cathy Hills
Associate Editor

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